A Chinese Marshall plan? #wonkbook

By Ezra KleinJune 8, 2012

On Thursday, UBS titled their morning economic briefing "nothing, nothing, nothing." It was a succinct summary of the expectations for the world's central banks: The European Central Bank had announced they wouldn't cut rates. The Bank of England is expected to continue with its current policies. And the Federal Reserve, UBS said, wasn't likely to announce anything new.

The banking and financial services conglomerate was right about all that. Bernanke expressed concern about the economy on Thursday. But he didn't express an immediate intention to do anything more about it. That said, the "nothing" strategy isn't absolutely universal: "In its first rate cut since the depths of the global financial crisis in December 2008, the People’s Bank of China lowered the interest rate on a one-year loan by a quarter percentage point to 6.31 percent, effective Friday."

A cyclist rides past the People's Bank of China in Beijing on June 8. China cut borrowing costs for the first time since 2008 and loosened controls on banks' lending and deposit rates. (Nelson Ching/BLOOMBERG)

Is that likely? Of course not. So, for Europe at least, the monetary policy outlook is still best summed up as "nothing."

Ben Bernanke's congressional testimony gave little hope for new stimulus. "Lackluster jobs data and storm clouds on the economic horizon have not yet convinced Federal Reserve officials that growth is slowing, nor that they should respond, the Fed’s chairman, Ben S. Bernanke, said on Thursday...Mr. Bernanke said that Fed officials were now updating their economic forecasts ahead of their meeting. If they determine that the pace of job growth is unlikely to rebound, they would discuss whether additional stimulus is warranted...But Mr. Bernanke, who controls the decision-making process, gave little indication on Thursday that he was ready to stick another needle into the economy...Mr. Bernanke also resumed his advocacy on Thursday for Congress to take a hand in lifting the economy through a combination of short-term spending and a long-term agreement to reduce the nation’s debts. He said he would be happier 'if Congress would take some of this burden from us.'" Binyamin Appelbaum in The New York Times.

@BCAppelbaum: Firefighters remain prepared to fight fires. That's what they do. The question is, does the Fed see a fire?

@justinwolfers: It's an amazing world we live in when a conservative central banker is on Capitol Hill, urging Congress to spend more.

The asymmetry of pressure on Bernanke: Hill Republicans want him to do less. Democrats don't want him to do more. "Judging from recent economic commentary, there are plenty of economists who think the Federal Reserve needs to do much, much more to juice the U.S. economy. Scott Sumner, Paul Krugman, and the Economist have all lambasted Fed Chairman Ben Bernanke on this front. But in Congress, this view seems curiously absent. On Thursday morning, Bernanke testified before the U.S. Congress Joint Economic Committee. Republicans at the hearing were quick to criticize the Fed chairman over recent reports that the central bank might contemplate more 'quantitative easing' -- the so-called QE3 -- to jump-start the stalling recovery. Very few Democrats, however, offered any sort of counterbalance. At the moment, most of the political pressure on Bernanke is to do less stimulus, not to do more...The ranking Democrat on the committee, Sen. Bob Casey, merely inquired, in a neutral tone, whether the Federal Reserve was planning to take further action." Brad Plumer in The Washington Post.

@BCAppelbaum: Rep. Maloney becomes the first Democrat to call for the Fed to "act forcefully." It only took 90 minutes.

But China's central bank cut is cutting interest rates. "China’s central bank cut a key interest rate today to give the country’s flagging economy a boost, cheering world stock markets. But many experts on the Chinese economy remain worried about the stability of the real estate sector and uncertain about whether the rate cut will spur enough consumer spending. In its first rate cut since the depths of the global financial crisis in December 2008, the People’s Bank of China lowered the interest rate on a one-year loan by a quarter percentage point to 6.31 percent, effective Friday. On the news, the Dow Jones industrial average rose as much as 140 points but then faded in afternoon trading to close up 46 points. Chinese economic authorities have resisted pressure in the past to lower rates, opting instead for strong fiscal stimulus measures. Since the last rate cut, the central bank has raised rates five times to soak up excess liquidity and dampen inflation pressures." Keith Richburg and Steven Mufson in The Washington Post.

A rescue deal for Spain inched closer to reality. "Spanish Prime Minister Mariano Rajoy said Thursday that he was in talks with fellow European leaders about shoring up this nation’s troubled financial system, with a deal possibly taking shape behind the scenes that could see Madrid ultimately receive what some have dubbed a 'bailout lite.' Rajoy said at a news conference that he was waiting to determine how much cash the country needs to stave off a full-blown banking crisis before settling on a final figure needed to recapitalize Spain’s ailing banks...Financial industry sources describe the plan as a smaller-scale bailout that could lend Spain an estimated $65 billion to $80 billion...Although the rescue funds would be channeled through the Spanish government, they would be earmarked strictly for the recapitalization of banks and could not be used to cover budget shortfalls, the industry sources said. Thus, Spain could potentially avoid many of the humiliating conditions...that were attached to other nations’ bailouts." Anthony Faiola and Michael Birnbaum in The Washington Post.

And its closely watched bond sale went smoothly. "Spain sold more than €2 billion ($2.5 billion) in bonds in a closely watched auction Thursday, reflecting rising hopes that the European Union would help recapitalize the struggling Spanish banks that have become the latest flash point in Europe's debt crisis. The Spanish treasury sold €2.07 billion in two-, four- and 10-year debt, slightly above the upper end of its target range. The average yield on 10-year bonds increased to 6.044% from 5.743% at the April 19 sale. That suggested that investors were punishing Madrid but hadn't closed the door to it as a borrower, a fear the government had raised earlier this week. Investor sentiment toward Spain appeared to get a boost from signals that EU policy makers are open to the possibility of providing a bailout for Spain that could be targeted to its banks--and wouldn't come with the same strict conditions that previously led Greece, Ireland and Portugal out of the market." Jonathan House in The Wall Street Journal.

But its credit rating was downgraded. "Fitch has downgraded Spain’s credit rating three notches to BBB, citing the cost of restructuring and recapitalising the country’s embattled banking sector. The rating agency estimated the cost of fixing Spain’s banking sector at €60bn - or as much as €100bn in a 'severe stress' scenario - and predicted the country would be mired in recession for the rest of this year and 2013. 'Spain’s high level of foreign indebtedness has rendered it especially vulnerable to contagion from the ongoing crisis in Greece,' Fitch said in its statement. The downgrade came after it emerged European officials were weighing up a bailout programme for Spain that would aid its banking sector while imposing only limited conditionality on Madrid. Earlier, a closely watched Spanish sovereign debt auction went better than some strategists had feared, but Madrid was still forced to pay higher yields than in the previous sale amid concerns about the eurozone’s economic and financial crisis." Victor Mallet and Robin Wigglesworth in The Financial Times.

Europe's woes are hitting a wide variety of U.S. companies. "From manufacturers in the Midwest to upscale retail shops in Manhattan, a wide variety of American companies are feeling the pinch of Europe’s economic contraction, helping to hold back recovery in the United States. Ford, the iconic U.S. car company, says that Europeans are not only buying fewer cars, but are replacing fewer parts. Kraft Foods, which is behind such brands as Swedish Fish and Dentyne, says sales of candy and gum in Europe are lagging. And jeweler Tiffany & Co. says fewer European tourists are shopping at its flagship Fifth Avenue store. Europe is suffering a financial crisis, fueled by dwindling investor confidence in the debts of such countries as Greece, Portugal, Spain and Italy and a beleaguered banking sector. In the United States, analysts are worried less about the financial system and more about the impact on companies outside Wall Street." Zachary Goldfarb in The Washington Post.

Top op-eds

1) KRUGMAN: Reagan was a Keynesian. "The Reagan-Obama comparison is revealing in some ways. So let’s look at that comparison, shall we? For the truth is that on at least one dimension, government spending, there was a large difference between the two presidencies, with total government spending adjusted for inflation and population growth rising much faster under one than under the other. I find it especially instructive to look at spending levels three years into each man’s administration -- that is, in the first quarter of 1984 in Reagan’s case, and in the first quarter of 2012 in Mr. Obama’s -- compared with four years earlier, which in each case more or less corresponds to the start of an economic crisis. Under one president, real per capita government spending at that point was 14.4 percent higher than four years previously; under the other, less than half as much, just 6.4 percent. O.K., by now many readers have probably figured out the trick here: Reagan, not Obama, was the big spender." Paul Krugman in The New York Times.

@grossdm: Just looking through some BLS data. Not new, but worth noting. In past 24 months, public sector has reduced employment by 1.078,000

2) ZAKARIA: Tax cuts won't jumpstart the economy. "Mitt Romney’s first major ad is substantive -- and wrong. He tells us that on his first day in office -- after approving the Keystone XL pipeline -- he will 'introduce tax cuts . . . that reward job creators not punish them.' The one idea that is almost certain not to jump-start this economy is a tax cut. Why can we be sure of this? Because that is what we have done for the past three years. For those who think President Obama’s policies have done little to produce growth, keep in mind that the single largest piece of his policies -- in dollar terms -- has been tax cuts. They actually began before Obama, with the tax cut passed under the George W. Bush administration in response to the financial crisis in 2008. Then came the stimulus bill, of which tax cuts were the largest chunk by far -- one-third of the total. The Department of Transportation, by contrast, got 6 percent of the total to fix infrastructure." Fareed Zakaria in The Washington Post.

3) NOAH: There's nothing wrong with paternalism. "Even as liberals and conservatives profess to hate the idea of government paternalism, both practice it. Liberals support restrictions on harmful things individuals do to their bodies, like smoking, driving without a seat belt, and riding a motorcycle without a helmet. Conservatives support restrictions on actions they deem harmful to the soul, like having abortions, using contraception, and marrying a person of the same sex...The truth is that there’s nothing inherently wrong with paternalistic government or, in the harsher, feminized shorthand of its detractors, the 'nanny state.' Parents and nannies can be good or bad. No adult likes to be told how to live his life, but most of us benefit from baby authoritarianism far more than we’d like to admit. The government doesn’t want me talking on the phone while I drive? I can’t say I’ve given that vice up completely, but fear of getting ticketed makes me do it a lot less than I used to, and I may live longer as a result." Timothy Noah in The New Republic.

4) COOPER AND WILEY: It's time to free taxpayer-funded research. "Students’ library cards are a passport to the specialized knowledge found in academic journal articles -- covering medicine and math, computer science and chemistry, and many other fields. These articles contain the cutting edge of our understanding and capture the genius of what has come before. In no uncertain terms, access to journals provides critical knowledge and an up-to-date education for tomorrow’s doctors, researchers and entrepreneurs...Although the bulk of published research is publicly funded, the journals that publish such crucial resources are often prohibitively expensive...With direct power over federal agencies that fund research, the president can mandate that articles resulting from our $60 billion annual investment in federal nondefense research grants be made freely available within six months." Matt Cooper and Elizabeth Wiley in The Washington Post.

5) JOHNSON: The prospects for a strong Volcker Rule are dim. "The regulators involved in drawing up the rules to carry out Dodd-Frank include the Federal Reserve’s Board of Governors, the Federal Deposit Insurance Corporation, the Commodity Futures Trading Commission, the Office of the Comptroller of the Currency and the Securities and Exchange Commission. They have still not been able to complete the rules, in part because, as with anything to do with modern finance, the details are complex. The draft regulations and explanations run 116 pages in the Federal Register. The C.F.T.C. held a roundtable on those current draft rules on May 31...The commission invited some leading experts on financial reform, individually and collectively with a great deal of practical experience - and skeptical of big banks’ ability to manage their risk-taking appropriately. Yet I remain pessimistic that regulators will adopt a strong final Volcker Rule in the near term." Simon Johnson in The New York Times.

Top long reads

Christopher Hayes on why elites fail: "A pure functioning meritocracy would produce a society with growing inequality, but that inequality would come along with a correlated increase in social mobility. As the educational system and business world got better and better at finding inherent merit wherever it lay, you would see the bright kids of the poor boosted to the upper echelons of society, with the untalented progeny of the best and brightest relegated to the bottom of the social pyramid where they belong. But the Iron Law of Meritocracy makes a different prediction: that societies ordered around the meritocratic ideal will produce inequality without the attendant mobility. Indeed, over time, a society will become more unequal and less mobile as those who ascend its heights create means of preserving and defending their privilege and find ways to pass it on across generations. And this, as it turns out, is a pretty spot-on description of the trajectory of the American economy since the mid-1970s."

Still to come: Overdraft fees jump; the House doesn't like the medical device tax; the farm bill moves forward; we're having our warmest year yet; and playtime with a kitty and a bunny.

Economy

The Fed's new capital standards proposal would apply to even small lenders. "The Federal Reserve shocked bankers Thursday by approving a proposal that would force even the smallest lenders to comply with the elaborate international bank-capital standards known as Basel III. The draft requirements would apply to all 7,307 U.S. banks, according to a proposal circulated by the Fed. Many bankers had expected regulators to exempt some small lenders from the new rules, which are aimed at shoring up the biggest global banks whose troubles fueled the financial crisis...The tougher capital rules backed by the Fed Thursday won't take effect until 2019 but will come as an unwelcome surprise to small bankers struggling amid uneven economic growth, tough new rules limiting fees and technological and regulatory moves that have made larger banks more profitable...The proposal is based on an agreement struck more than a year ago by international financial regulators." Victoria McGrane, Matthoas Rieker, and Dan Fitzpatrick in The Wall Street Journal.

Despite the efforts of regulators, overdraft fees are rising. "Checking account overdraft fees have jumped during the past two years, despite an effort by regulators to rein in aggressive practices by banks, according to new reports by two nonprofit groups. Although the basic overdraft fee of $35 hasn’t changed in two years, banks have imposed other harsh penalties on consumers for minor lapses, the papers said. The Pew Health Group, a research organization, called for the new Consumer Financial Protection Bureau to press banks to be more upfront about these 'still risky' fees in a paper to be published Friday...Although the Federal Reserve in 2009 required banks to tell customers about overdraft penalities, the disclosure statements were often unclear and tough for consumers to follow, the two reports said. The Fed in 2010 also prohibited banks from imposing overdraft charges unless a customer had signed up for the service. Another regulator set limits on the number of times customers can be charged overdraft fees." Amrita Jayakumar in The Washington Post.

New Treasury Department rules will make it harder for companies to move to low-tax countries. "The Treasury Department issued new rules making it harder for U.S. companies to move to low-tax countries, amid a rising debate over U.S. business-tax policy. The move Thursday comes just days after Cleveland-based Eaton Corp. announced plans to relocate to Ireland, through a deal to acquire Ireland-based Cooper Industries PLC. The Eaton-Cooper deal represents the latest in a series of similar relocations that some tax experts expect to see increase in number. The new rules make it tougher for many U.S. companies to relocate to low-tax countries through merger by requiring the combined firms to have 25% of employees, property and gross income in the new home country. If firms don't meet these requirements, they face substantial tax penalties. The previous rules required substantial business activity in the new home country, a fuzzier standard." John McKinnon in The Wall Street Journal.

Companies are sitting on much less cash than previously believed. "That record pile of idle corporate cash turns out to be much smaller than previously believed. Half a trillion dollars smaller. One of the enduring frustrations of the U.S. economic recovery has been companies’ tendency to hoard cash rather than using it to hire or invest. The issue has become a political football, with Democrats criticizing companies for not spending and Republicans saying excessive regulation was deterring corporate investment. But in its quarterly 'flow of funds' report on Thursday, the Federal Reserve sharply revised its estimates of how much cash companies are holding on their balance sheets. The bottom line: Corporations have nearly $500 billion less cash on hand than previously believed. To be sure, companies are still holding onto an unprecedented amount of cash. As of the end of March, nonfinancial corporations had $1.74 trillion in liquid assets on their balance sheets, $12.6 billion more than at the end of the year." Ben Casselman in The Wall Street Journal.

@bencasselman: Note: Corps aren't reducing their cash holdings. But cash as a share of assets is trending down.

The House voted to repeal the medical device tax. "In another assault on President Obama’s health care law, the House passed a bill on Thursday to repeal a new tax on medical devices. The vote was 270 to 146, as 37 Democrats joined 233 Republicans in supporting the repeal. The bill appears to have little chance of approval in the Senate, where Democrats are in control, and Mr. Obama threatened to veto the measure if it reached his desk...The excise tax on medical devices, scheduled to take effect in January, is one of many taxes and fees imposed by Congress to help offset the cost of subsidizing insurance coverage for more than 30 million people...House Republicans would pay for repealing the tax by recouping some subsidies provided to low- and middle-income people to help them buy insurance. Eligibility for subsidies is based on a person’s income. People who experience an increase in income may receive larger subsidies than they are entitled to. The bill would allow the government to recover those overpayments." Robert Pear in The New York Times.

Since passage of the health care bill, millions of young adults have joined their parents' health plans. "About 6.6 million young adults signed up for health coverage through their parents' insurance plans in the first year after a new provision in the federal health law took effect, according to estimates in a study released Friday. As part of the law, most insurance plans offered by employers to their workers had to allow parents to enroll dependents on their plans up to the age of 26, starting in September 2010. Previously, parents had been able to include children only up to their 19th birthdays, or until the age of 22 if the children were full-time college students...The new estimate was generated by the Commonwealth Fund, a private foundation that supports the health law. Its estimate that 6.6 million young adults are taking advantage of the change is substantially higher than the government number because it includes people who might have previously received insurance from another source, such as an employer or an individual plan, but signed up for their parents' plans instead." Louise Radnofsky in The Wall Street Journal.

Domestic Policy

Reid also said he may push for changes to the filibuster. "A frustrated Senate Majority Leader Harry Reid (D-Nev.) on Thursday said he will likely push for changes to filibuster rules if the Democrats retain control of the upper chamber next year. 'I’ll just bet you ... if we maintain a majority, and I feel quite confident that we can do that, and the president is reelected, there is going to be some changes,' Reid said on the Senate floor. 'We can no longer go through this, every bill, filibusters [even] on bills that they agree with. It’s just a waste of time to prevent us from getting things done.' It remains unclear, however, if Reid would have the votes to change the Senate’s rules, which would require a simple majority vote at the start of the new Congress. Should Democrats retain control of the Senate, they will likely have a razor-thin majority in 2013. Only one or two defections could lead to defeat of the motion, as all Republicans are united against such a change in rules." Pete Kasperowicz in The Hill.

The Senate advanced the farm bill. "The Senate on Thursday voted to advance a farm bill that will set the nation’s nutrition and agriculture policy for the next five years. The vote was 90 to 8. With the vote, the Senate will begin about a week of debate to consider the bill and amendments, according to Senator Debbie Stabenow, Democrat of Michigan, who is chairwoman of the Agriculture Committee and managing the legislation. The bill is expected to cost about $969 billion over the next 10 years, but cuts overall spending by $23 billion. The cuts mainly reflect the elimination of direct payments to farm landowners, which cost about $5 billion a year, and cuts about $4.5 billion over 10 years from the food-stamp program...Among other provisions, the bill would eliminate direct payments to farmers and make expanded crop insurance program the primary safety net for farmers. The government now spends about $7 billion a year on crop insurance to pay about two-thirds of the cost of farmers’ premiums." Ron Nixon in The New York Times.

Harry Reid proposed a new way to pay for the student loan and highway bills. "Seeking to break a congressional impasse, Senate Majority Leader Harry Reid (D-Nev.) is offering up another way to pay for an extension of student loan interest rates that are set to rise on July 1. In a letter to Speaker John Boehner (R-Ohio) and Senate Minority Leader Mitch McConnell, Reid proposed a combination of two measures: making some reforms to pension payment contributions by employers, as well as increasing premiums paid by businesses for Pension Benefit Guaranty Corp. coverage. Both ideas have garnered bipartisan support, Reid said. The measures together would pay not only for the $6 billion cost of extending the current 3.4 percent rate for federal student loans but also for reauthorizing the surface transportation programs, Reid said...If the disagreements over passing a transportation bill persist, Reid suggested that Congress use part of the revenue to pay for the student loan bill 'immediately.'" Seung Min Kim in Politico.

It's been a tough year for government workers. "This has been a difficult year for government workers across the country, fighting uphill battles to hang on to their pensions and stable salaries -- and it’s not over yet. From California to Pennsylvania, workers are facing efforts to sharply curtail the job security and benefits they have enjoyed for years, perks long viewed as compensation for the sometimes lower salaries in the public sector. Now, the perks that came with being a firefighter or a teacher have become a target, not only for conservative lawmakers but for Democrats under pressure to make deep cuts in government budgets...Public workers have also borne much of the brunt of job cuts in recent years. Since June 2008, state and local governments have shed more than 600,000 jobs. And while the private sector has experienced some recovery, public sector job losses continue to mount." Sandhya Somashekhar and Krissah Thompson in The Washington Post.

The U.S. is having its warmest year to date. "Federal data released Thursday show the United States has had its warmest spring, it's warmest year to date, and warmest 12-month stretch on record. The National Oceanic and Atmospheric Administration released figures showing that temperatures during the March-May period in the contiguous United States were far above average, according to records dating back over a century. 'The spring season's (March-May) nationally averaged temperature was 57.1°F, 5.2°F above the 1901-2000 long-term average, surpassing the previous warmest spring (1910) by 2.0°F,' NOAA reported. NOAA, citing temperature data that extend back to the late 1800s, also reported that the first five months of 2012 were the warmest on record for the lower-48 states. The average 2012 January-May temperature of 49.2 degrees was 5 degrees above the long-term average, while the last 12 months were also record-breaking." Ben Geman in The Hill.

@Ben_Geman: The NOAA data also shows the US is having warmest year to date, and had warmest 12-month stretch according to records dating back to 1895

Wonkbook is compiled and produced with help from Karl Singer and Michelle Williams.